Congress recently passed, and President Trump signed, a new law providing additional relief for businesses and individuals during the COVID-19 pandemic. One item of interest for small business owners in the Consolidated Appropriations Act (CAA) is the opportunity to take out a second loan under the Paycheck Protection Program (PPP).
The CAA permits certain smaller businesses who received a PPP loan to take out a “PPP Second Draw Loan” of up to $2 million. To qualify, you must:
- Employ no more than 300 employees per physical location,
- Have used or will use the full amount of your first PPP loan, and
- Demonstrate at least a 25% reduction in gross receipts for any quarter of 2020 compared to the same quarter in 2019. Alternatively, an entity may compare their annual revenues on their 2020 tax return to their 2019 tax return to show a 25% reduction.
The PPP funds are also eligible to first-time applicants with 500 or fewer employees. Eligible entities include for-profit businesses (including those owned by sole proprietors), certain nonprofit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, independent contractors and small agricultural co-operatives. Most 501(c)(6) organizations are newly eligible with this legislation provided they have 300 or fewer employees and do not receive more than 15% of their gross receipts from lobbying activities.
Recently released guidance has stated that the last day to apply will be March 31, 2021. Applicants will file Form 2483-SD (Paycheck Protection Program Second Draw Borrower Application Form) with their lender.
Here are some additional points to consider:
Loan terms. Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the year preceding the loan or the calendar year. However, borrowers in the hospitality or food services industries (NAICS codes beginning with 72) may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.
Simplified application. Borrowers of PPP Second Draw Loans of $150,000 or less may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement. Nonprofits and veterans’ organizations may use gross receipts to calculate their revenue loss standard. These borrowers will be eligible for a one-page simplified forgiveness application.
Loan forgiveness. Like the first PPP loans, a PPP Second Draw Loan may be forgiven for payroll costs and nonpayroll costs such as rent, mortgage interest and utilities. Additional costs potentially forgivable within the second round of PPP include personal protective equipment, essential expenditures to suppliers, software costs and accounting costs. To achieve full forgiveness an entity must spend no less than 60% on payroll costs over a covered period of between eight and 24 weeks at the election of the borrower. Forgiveness of the loans is not included in gross income.
Deductibility of expenses paid by PPP loans. The CARES Act didn’t address whether expenses paid with the proceeds of PPP loans could be deducted. The IRS eventually took the position that these expenses were nondeductible. The CAA, however, provides that expenses paid both from the proceeds of loans under the original PPP and PPP Second Draw Loans are deductible.
Contact us with any questions you might have about PPP loans, including applying for a Second Draw Loan or applying for loan forgiveness.